12/30/2010 @ 6:00PM

Shrink It, Cure It

It has been a miserable year for the British drug giant GlaxoSmithKline. Its shares have gone nowhere (and declined 20% since late 2005), its sales are all but stagnant, and its news feed is a depressing drumbeat of legal and public relations woes. The Avandia story just gets darker: In February Senate investigators accused Glaxo of minimizing data that its diabetes drug caused heart problems; seven months later regulators heavily restricted Avandia’s use in the U.S. and took it off the market entirely in Europe. In October Glaxo paid $750 million to settle charges it produced tainted drugs. Last month Food & Drug Administration advisers rejected its bid to get a drug approved for preventing prostate cancer. The company’s huge-selling asthma inhaler, Advair, could face knockoffs in a few years. Glaxo’s labs have not produced a big new hit in ages.

“This industry is under huge pressure,” says Andrew Witty, GSK’s chief executive, in a lightly accented British baritone. “There is no point in dreaming about being in a different world. We have to change.” The 46-year-old, one of a new generation of drug CEOs, came to power in 2008 after holding various marketing positions in Asia, Africa and Europe. His blunt diagnosis: Drug companies became “complacent” in the 1990s. They were slow to react when insurers rebelled against me-too drugs and regulators became more worried about side effects.

His solution is to focus on customers and diseases that the industry long ignored, while rebuilding research from the ground up. Shunning megamergers, Witty has shifted resources toward emerging markets that are eager to get access to Western drugs, and to stable markets like vaccines and consumer products. Today only 23% of GSK’s $44 billion in annual sales comes from selling pills in big Western countries, down from 40% in 2007, while 24% of sales comes from emerging markets, which are growing at an 18% clip.

Witty hopes this will stabilize the company until his research overhaul comes through. “Before, the whole thing depended on having breakthroughs, and if you didn’t have breakthroughs it was downside risk,” Witty says. But no matter how much he spins it, there’s no avoiding the essential nature of the drug business: Big growth will come only if Glaxo’s labs come through with new medicines.

Witty has abandoned me-too drugs–shutting down research into depression, anxiety, pain and other mature categories–and created 40 tiny biotech-style units that have autonomy. They are focusing on the types of high-risk science that a few years ago would have been seen only at innovative biotech companies with nothing to lose. Glaxo has projects on everything from stem cells to gene therapy for rare immune diseases to an emerging area called epigenetics, which looks at how genes are modified.

With the notable exception of a once-a-day successor to asthma inhaler Advair, almost all of the 18 new drugs in late-stage trials are totally new classes of medicines. One aims to become the first treatment to delay the progression of Type 1 diabetes in newly diagnosed kids and adults. Another is a vaccine to prevent lung cancer from recurring; it could open up a whole new wave of treatments that stimulates the body’s immune system against cancer. A third could become the first drug in a new class to prevent heart attacks by stabilizing plaque in arteries. This could hit $10 billion in sales if it works.

Glaxo’s first big success may come early next year, if its new lupus drug, Benlysta, is approved by regulators. It would be the first new drug for the autoimmune disease in 50 years. While GSK’s partner Human Genome Sciences invented the drug, Glaxo invested in HGS’ gene-hunting technology back in 1993 and stayed the course even after murky early results. With little competition, it could reap $5 billion in sales despite its modest effectiveness, analysts say. Glaxo will get half the profits. Says Witty: It “has the potential to be transformational.”

The ever cautious Witty won’t make sales forecasts but says underlying revenue growth is 6% when Avandia’s decline and other one-time events are excluded. He adds: If any of the new pipeline drugs comes through, “the upside opportunity for the company is enormous.” The pressure to produce is intense, he admits. He says investors ask him, “Andrew, you spend $6 billion a year on R&D. Are you concentrated on what you’re doing with it, or is it just a black hole?”

Some people, at least, are buying the argument. “Glaxo has the best, the brightest, the most booming pipeline in the industry over the next three years,” says UBS analyst Gbola Amusa. “Its lower U.S. exposure and higher emerging markets exposure is exactly what you want” at a time where most growth is coming from abroad. He predicts that Glaxo’s sales will grow at a 7% clip over the next five years, versus 3% or 4% for the rest the industry.

While a 25-year Glaxo veteran, Witty is still something of an outsider. He joined fresh out of the University of Nottingham, where he got an economics degree. He devoted his early years to marketing positions in South Africa and Singapore and the U.S. before taking charge of European operations. “I spent most of my career far away from the center. I wasn’t in the inner sanctum,” Witty says. That turned out to be an advantage because “you are constantly seeing different ways of doing things.” In 2007 he prevailed over two other internal candidates in a two-year competition for the top slot. (Runner-up Chris Viehbacher now heads Glaxo’s French rival, Sanofi-aventis.)

Drug companies fixated on maintaining high prices in the West have long resisted lowering prices in poorer countries so more people could afford them. One of Witty’s first moves in 2009 was to create a tiered system that lowered prices for various drugs for emerging markets, including medicines for asthma, allergies, hepatitis and bacterial infections. In the poorest African countries Glaxo’s drugs are no more than 25% their price in Western countries. Richer countries like China and India get somewhat higher prices. The company also created smaller pill packets and asthma inhalers for people who couldn’t afford to buy a full month’s supply at a time.

Emerging market sales have exploded as a result. “There is a double bottom line here,” says Abbas Hussain, whom Witty lured away from Eli Lilly to lead the emerging market effort. “You make products far more affordable to a greater proportion of the patients” and make more money.

Revitalizing research is a far more difficult task. Witty knows well there are no quick fixes. GSK’s two predecessor companies, SmithKline Beecham and Glaxo Wellcome, which merged to form GSK in 2000, had been among the first to invest in gene-hunting technology that scientists once thought would fast lead to a bushelful of new drugs. The gene-hunting found hundreds of new targets, yet drugs like the lupus medicine are only now beginning to emerge.

One problem was that Glaxo scientists often refused to give up on their pet projects. The success rate for internally developed drugs in big trials was half what it was for drugs Glaxo acquired from the outside. “Everyone fell in love with their own projects and carried them through even when they were moribund,” says Glaxo R&D chair Moncef Slaoui. Scientists tended to have a checklist mentality, passing a drug to the next stage if it narrowly worked in the previous test, instead of reviewing all the data to see whether the project still made sense. With outside projects, Slaoui says, “we don’t own it emotionally and scrutinize every aspect in a very objective way” before investing. Slaoui created a 20-member internal review board to give all drugs the same kind of heavy-duty scrutiny before large trials began. Several drugs have been dropped as a result, including a diabetes drug that worked fine but had no obvious advantages over similar compounds rivals were testing.

Witty’s signature move in 2008 was to divide early-stage research into 40 biotech-style research teams, with between 7 and 70 scientists each. Each unit leader is like the head of a little biotech company and gets a set three-year budget and freedom to invest it as he sees fit. Witty “was absolutely instrumental in pushing for this,” says GSK senior vice president Patrick Vallance. “The whole thing that drug discovery is some process is rubbish,” Witty says. “It is about creative people . . . and can you create luck in the lab.” Put smart people together and “they bump into each other and you get serendipity.”

Like small biotech companies, there’s real pressure to produce–or else. After three years Glaxo will review the results and could disband units that aren’t producing. “We will give people a chance to make amazing discoveries but are not going to indulge in prolonged wasted research programs,” Witty says. “I’ve been here 20 years. We have written lots of plans,” says Glaxo microbiologist David Payne, who heads a biotech unit devising new antibiotics. “This is the first time where there is somebody waiting at the end to see what they got for their money. It is very clear who is accountable for success or failure.”

The new structure gives Payne freedom to try new ideas. One drug Glaxo is testing in early human trials is licensed from biotech company Anacor Pharmaceuticals and uses a new type of chemistry based on the element boron. This allows it to hit a key bacterial target that Glaxo had been unable to block with standard carbon chemistry. In the lab Glaxo has screened it against 2,000 bacterial strains from around the world and not found one that is resistant. Another approach aims to restorethe effectiveness of existing drugs by blocking bacteria’s ability to pump antibiotics out, one mechanism of resistance.

In another case, when Glaxo didn’t have the expertise in-house, it created biotech company Tempero Pharmaceuticals to push forward science for treating autoimmune diseases such as multiple sclerosis and psoriasis. Glaxo provided the initial funding and holds a controlling stake, but the Cambridge, Mass. startup runs independently. “This could be a new model for drug discovery,” says Spiros Jamas, a biotech veteran hired to run Tempero. Being a few miles away from Tempero’s scientific founders at Harvard “is a huge advantage” over being at an office in Philadelphia or London, he says.

Even Glaxo’s dealmaking has tended toward far-out science. Some of it has been controversial–as when GSK shelled out $720 million in 2008 to buy Sirtris, which was working on drugs against age-related diseases based on the red wine chemical resveratrol. Since then rival researchers at Pfizer have questioned whether Sirtris’ drugs work by the mechanism Glaxo claims. Tests of one Sirtris drug had to be halted after it was linked to kidney damage in cancer patients. Other Sirtris compounds are still in testing. Witty says he has no regrets.

Harvard Business School professor Gary Pisano doubts the reorg will make a giant difference. The core problem afflicting drug firms isn’t bureaucracy but a “lack of deep understanding of disease biology. How you organize it isn’t going to solve that,” he says. His studies show that biotech companies are no better than Big Pharma at inventing drugs. “Unless a company can develop world-class science, these units will have the same poor track record as biotech.”

But does Glaxo have a choice? Darapladib, the drug to stabilize plaque in arteries, is typical of the gambles drug companies must take these days. Along with the lupus drug, it is one of the first drugs to emerge from Glaxo’s gene-hunting efforts. To prove it prevents heart attacks, Glaxo is running two trials in a combined 27,000 patients. The trials must be big because there are so many good heart drugs already and proving an additional benefit is hard. The first results could come in two years.

In the long run Slaoui argues that Glaxo’s strategy is less risky than it sounds. “Pursuing a me-too medicine is the highest risk strategy. You spend all the money and have nothing at the end” when insurers won’t pay for it, he says.

Restoring public trust in Glaxo will be the hardest feat. Witty’s tenure has been overshadowed by the Avandia mess. In May 2007, a year before Witty took over as CEO, Cleveland Clinic cardiologist Steven Nissen published an analysis suggesting Avandia boosted the risk of heart attacks by 43%. It wasn’t definitive. The problem for Glaxo was that its own analysis–which it had quietly shared with the FDA–was consistent with Nissen’s result. Glaxo rushed out early data from a big ongoing safety trial to rebut the heart risk concerns.

The Senate investigation concluded that Glaxo tried “to minimize or misrepresent findings that Avandia may increase cardiovascular risk” and “attempted to intimidate independent physicians” worried about Avandia’s risks. In July an FDA reviewer concluded that the big trial that seemed to exonerate the drug was seriously flawed, helping lead to the decision to restrict sales. The company staunchly denies the Senate conclusions but has had to set aside $2.4 billion to settle lawsuits over Avandia and other drugs. In addition, the Justice Department and several states are looking into Avandia’s marketing.

Witty, who is not mentioned by name in the 342-page Senate report, insists his company was “transparent” in its communications on Avandia. “I truly believe that that is how the company has behaved in the last few years around this.” He says the three-year controversy reflects the messy nature of drug risk assessment when definitive data isn’t available. “It has come to a conclusion. Now we move on.”